Don Miller (Money Morning):
The U.S. Federal Reserve may take an unorthodox approach to raising interest rates by paying interest on bank reserves rather than relying on traditional open market remedies, as it exits from its long-term fiscal stimulus programs, Reuters reported today (Tuesday).

Paying interest on reserves is mostly untested and would represent an unexpected twist in the Fed’s response to the financial meltdown.

“In the old days … the Fed controlled the federal funds rate with open market operations,” Antulio Bomfim, a former Fed economist now with Macroeconomic Advisors LLC in Washington told Reuters. “Now, at least in this period when reserves are over-abundant, the way the Fed hopes to raise the federal funds rate will be primarily by raising the interest rate it pays on reserves.”

Usually, when the central bank wants to set a target for the federal funds rate it buys or sells Treasury securities on the open market, influencing interest rates by deploying or withdrawing capital.

By paying interest on reserves, the Fed makes it attractive for banks to keep their money at the central bank as long as interest rates in private markets are lower.

By doing that, the Fed can put a floor under the lending rate that banks charge each other for overnight loans, which is the central bank’s traditional choice for influencing the economy. Open market operations to raise interest rates would be relegated to a supporting role in the initial stages of tightening.

In order to spark an economy mired in deep recession . . . Click here to read the rest of Mr. Miller’s article.

And that’s caused commodities to soar as currency speculators and safe-haven investors head for higher ground.

At the culmination of the policymaking Federal Open Market Committee’s (FOMC) two-day meeting Wednesday, Fed Chairman Ben S. Bernanke revealed that the central bank would purchase up to $300 billion in longer-term Treasury securities, as well as an additional $750 billion of mortgage-backed securities. The central bank also said it would buy debt issued by government-sponsored agencies such as Fannie Mae (FNM) Freddie Mac (FRE).

“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion, to a total of up to $200 billion,” the Fed said in its statement.

“Moreover,” the statement went on, “to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

Many analysts believe that Bernanke’s announcement was a bold attempt to instill confidence in the markets and loosen credit for consumers and businesses.

Harm Bandholz, economist at UniCredit Research in New York, noted that the Fed had bought only 19% of the mortgage-backed securities and only 40% of the agency debt that it had already said it was buying, so there was no rush to announce more purchases.

“The Fed employed its shock-and-awe policy,” Richard Schlanger, a vice president at Pioneer Investment Management – who helps invest $13 billion in fixed-income securities – told Bloomberg News. “This has to have a profound impact on credit spreads going forward.”

However, others like BBC economics editor Stephanie Flanders said the only shock from the Fed’s decision was felt by investors who view the act as more desperate than bold.

“Why have this new spending spree at all?” she asked. “The answer may be that the Fed – and the administration more generally – is concerned that the apparent improvement in credit conditions the past few months is a false dawn.”

The Conference Board’s gauge of lagging indicators, which measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit, dropped 0.4% last month – after posting a 0.3% drop in January.

The London Interbank Offered Rate (LIBOR), the overnight rate at which banks charge each other for loans, stood at 1.33% last Wednesday – a week before the Fed’s announcement. That was near the highest level since Jan. 8 and up from this year’s low of 1.08% on Jan. 14, the British Bankers’ Association said. The rate stood at 1.29% Tuesday. The rate dropped about six basis points yesterday (Thursday) to 1.23% – its lowest level in two months. The LIBOR-OIS spread, a gauge of bank reluctance to lend, slid seven basis points to 100 basis points, Bloomberg reported.

Commodities Soar as Treasuries and the Dollar Lose Their Allure

Chairman Bernanke’s ambitious asset purchase plan may have unlocked the credit markets – at least for the time being – but it also capped Treasury yields, driving investors from the currency many had fled to as a safe haven.

The yields on 10-year Treasury notes fell 47 basis points – the most since 1962 – after the Fed’s announcement Wednesday. The yield on the notes, which climbed as high as 3.02% Wednesday, stumbled back down below 2.5%.

“The Fed is capping Treasury yields,” David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc., told Bloomberg. “I don’t think we will see rates drift back up above 3%; everyone looks at that as being the ceiling.”

Glocke added: “If rates drifted to that level I’d be a buyer.”

At this point, Bernanke is basically financing the national deficit by buying debt issued by the Treasury. In addition to capping Treasury yields, expanding the Fed’s balance sheet and printing more money to accommodate these purchases has sharply undermined the value of the dollar.

“This definitely introduces a longer-term current of downside pressure on the greenback,” Sacha Tihanyi, a Toronto- based currency strategist at Scotia Capital Inc., wrote in a note to clients. “The Fed pulls out all the stops and the U.S. dollar gets whacked. The market will be looking to find its feet over the next few sessions.”

The euro traded as high as $1.3716 yesterday (Thursday), the highest level since early January, according to Reuters data.

“Apart from being negative for the dollar, we expect yesterday’s events to be bullish for commodity currencies such as the Australian dollar, Norwegian crown and Canadian dollar, and currencies of countries less likely, for whatever reasons, to engage in the monetization of government debt such as the euro,” Barclays Capital (BCS) strategists said in a research note.

The Norwegian crown gained as much as 3.2% yesterday, while the Australian dollar touched 69.44 U.S. cents, the highest since Jan. 12, Bloomberg reported. And the Canadian dollar touched C$1.2193 per dollar, its strongest level since Feb. 10. The Canadian currency has climbed 2.8% in the last two sessions, the biggest two-day rally in three months.

Both gold and oil soared more than 7% yesterday, with gold for April delivery surging $69.70, or 7.8%, to end at $958.80 an ounce on the Comex division of the New York Mercantile Exchange. Oil briefly topped $52 a barrel before settling the day at $51.72 a barrel on the NYMEX.

By allowing the dollar to weaken, Bernanke is basically betting inflation will not return in force for sometime. Analysts are split on the tactic.

Some analysts believe the central bank has little choice but to put concerns about inflation aside for now and focus on sparing the economy a far worse collapse. But others, like Michael Farr, president of Farr, Miller & Washington LLC, are far more skeptical.

“Looking ahead, we fear inflation,” Farr told MarketWatch. “It may be that Dr. Bernankenstein has created a monster beyond his control.”

Source: Fed’s $1 Trillion Debt-Buying Plan Loosens Lending and Drains the Dollar

• The U.S. Federal Reserve said yesterday (Thursday) that it will purchase up to $300 billion of longer-term Treasury securities over the next six months. The Fed will also purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities.  The announcement accompanied its decision to keep interest rates at historically low levels.

• Sources told The New York Times that IBM Corp. (IBM) is in talks to buy Sun Microsystems Inc. (S) for at least $6.5 billion, which would be twice the value of Tuesday’s closing price of Sun’s shares. If a deal if reached, it would be IBM’s largest acquisition and one that would bolster the company’s standing among high-end computer server companies.

• About 1,471 hedge funds shut down last year, exceeding the previous record of 848 by 70%. In the fourth quarter alone, more than half of those hedge funds bellied up. “It’s been a great culling of mediocre managers,” Tammer Kamel, president of Toronto-based Iluka Consulting Group Ltd., which advises clients on hedge-fund investments, told Bloomberg. “Those funds that will be around this year are the ones with the right skill set.”

• Minnesota-based Food maker General Mills Inc. (GIS) posted fiscal third-quarter earnings of $288.9 million, or 85 cents a share. The numbers were below its expectations and caused by the effects of a strong dollar and high costs, Reuters reported.

• The World Bank said that China’s economy is showing “early signs” of stabilization, while forecasted the nation’s economic growth at 6.5%, Bloomberg reported. “The government’s stimulus is working,” said Louis Kuijs, a senior economist at the World Bank in Beijing. “China’s fundamentals are strong enough to ride out this storm.”

• Edward Liddy, chief executive of American International Group Inc. (AIG), has asked employees of the bailed out insurer that took home more than $100,000 in bonuses to return at least half, CNN reported. “It was distasteful to make these payments,” Liddy told members of the House Financial Services subcommittee. “This morning, I’ve asked the employees of AIG Financial Products to step up and do the right thing. Specifically, I’ve asked those who received retention payments in excess of $100,000 or more to return at least half of those payments.”

Source: Global Investment News Briefs Thursday, March 19, 2009

In case you were wondering, this Fed Credit is the stuff that the Federal Reserve magically makes appear, literally at the push of a button on a computer, on the balance sheets of the nation’s banks, where it sits until someone wants to borrow some money from the bank, whereupon the banks can loan out Huge Freaking Multiples (HFM) of the amount of the original credit by virtue of the scam known as “fractional-reserve banking.”

And when this new Fed-created credit is lent by the banks, at that point it becomes “money”, and it adds to the money supply, which expands. And since the money is used to buy something (or else why else borrow it?), it bids up prices, which is the inflation in prices that you get from an increase in the money supply! A horror!

And you don’t have to take my word for it, as Mike Hewitt and Krassimer Petrov wrote the essay “Money Supply and Purchasing Power” at Dollardaze.org. They looked at the money supply since 1971 to 2008, which is “the post-Bretton-Woods period. Bretton Woods is the period that characterizes the international monetary regime between WWII and 1971. After the Second World War, only the U.S. Dollar remained convertible to gold at a rate of US$35 per troy ounce. During that period all other currencies were linked to the dollar at a fixed exchange rate. On August 15, 1971, President Nixon unilaterally closed the ‘gold window’ to prevent foreigners from exchanging their U.S. Dollars for gold.”

What they found was a “near-perfect inverse relationship between the amount of money in circulation and its purchasing power. It reflects the simple relationship that prices increase approximately proportionately to money supply. Stated differently, it reflects the basic tenet of monetarism that in the long-run, price inflation is a direct consequence of increase to monetary inflation.”

I know what you are thinking, because I am thinking it, too. We want to know, “What about the actual data? We ask because we have been listening to Ben Bernanke and all the rest of those neo-Keynesian, government lackey morons summarizing their data, and they say everything is going along just fine, and that everything is wonderful, so now we are paranoid and suspicious now that we know that we are being lied to at Every Freaking Turn (EFT).”

Perhaps anticipating our question, they write, “Looking at the data, from January 1971 to December 2008, the U.S. money supply increased 16.8 times; this was accompanied by an 81.1% drop in purchasing power of the dollar, as implied by the governmentally-reported CPI.”

And how did this affect gold? I’m glad you asked, because I have been pounding the table like a demented village idiot for years that you should be buying gold, and so people want to know “Is the opinion of The Ridiculous Mogambo (TRM) as stupid as he sounds about this money inflation thing?’

My answer is, “No, not in the case of gold, but yes for most everything else I say” while their answer is, “For the same period and using the same CPI statistics, the purchasing power of gold has actually increased four times. The price of gold is up from about $38 to about $822, which corresponds to an increase in its price of almost 22 times, while the CPI is up from about 40 to 210, or about 5 times. Thus, for the period, the price of gold has increased about 22 times, while the price level has increased about five times, resulting in an increase in the purchasing power of gold of about four times; the exact increase is 310%, which corresponds to purchasing power of a little over four times” at the same exact time as “the purchasing power of major currencies is down 5-10 times.” Wow!

Naturally, I am halfway out the door to buy more gold, because with the Federal Reserve, with their laughable equations based on the socialist madness of John Maynard Keynes to give them a mathematical excuse to create vastly excessive amounts of money and credit like proverbial profligate idiots, to a degree even more horrifying than during the tenure of Alan Greenspan (the moron who single-handedly got the world into this mess), gold will go up explosively, just like it already has and just like it has Every Freaking Time (EFT) in all of history – In all of history!!!! – when a stupid government continually spent more money by going farther into un-payable debt!

The sharp-eyed among you no doubt noticed the 4 exclamation points in the paragraph above, which I cleverly used to indicate extreme emphasis, as one should have gathered from the phrase “in all of history” but probably didn’t, thus the punctuation was chosen for your benefit, at no extra charge. You are welcome.

So, what can we conclude from this whole analysis? I say, “Many things!”

Firstly, I conclude, “We’re freaking doomed!”

Secondly, I conclude that I gotta get more gold, and from that I thirdly conclude that I gotta get rid of one or more of the kids because I can’t afford both, and I can’t think of a legal way, and it’s a hell of a problem for me right now.

Messrs Hewitt and Petrov think that “The overall conclusion is that gold is a significantly better store of value than paper currencies” which pretty much says it all!

Whee! This investing stuff is easy!

Source: Go Ahead, Make My Money

Free money for everyone… forever.

The Fed’s 75-point cut yesterday makes history on two counts. At a “range” of 0-0.25%, the Fed’s rate hasn’t been this low in half a century — and they have never set a range to their target lending rates.

But that wasn’t all. In a monetary version of “shock and awe” policymaking, the Fed threw “all available tools” at the crisis. Other groundbreaking details include:

• An assurance that the nearly nonexistent rate will stay low “for some time”
• Confirmation that the Fed’s $600 billion mortgage-backed security and agency debt repurchase program will roll out “over the next few quarters”
• A hint at the FOMC’s interest in purchasing longer-term Treasury securities
• Promises that the Fed “will continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

“This announcement,” Dan Amoss wrote to his readers, “convinced the markets that the Fed will inflate as much as necessary to stave off deflation. I expect the Fed to work even closer with the Treasury Dept. under the Obama administration. This may include a major mortgage refinancing initiative in 2009. A hint of such an initiative could spark an extension of the stock market rally that began in late November.

“This radical new dollar debasement will not come without consequences; expect further gains in the price of precious metals.”

In anticipation of this “shock and awe” rate decision, Dan helped his Strategic Short Report readers take 245% profits just hours before the Fed’s announcement yesterday. How about you? Learn more here.

Nearly all stocks soared after the Fed’s press release. Expecting a 50-point cut and far less aggressive policy implementation, traders went all in. The Dow rose 4.2%. The Nasdaq and S&P 500 jumped even higher.

Banks, of all freaking things, led the way… now that they can get their money for nothing and their chicks for free. If Greenspan’s 1% rates following the tech bust begat a bubble the size and scale of the housing mess — just imagine what mayhem a few quarters of 0-0.25% rates will do. Oy.

At least… that’s what we suspect the Fed was thinking.

This morning, it looks like the rate cut buzz has already worn off… the Dow opened down 80 points.

“The Federal Reserve wants us to believe,” opines GoldMoney’s James Turk , “that the sole problem reverberating throughout the world is simply a lack of liquidity, but it is nothing of the sort. It is in one of solvency. Most banks and many consumers and companies are overextended, and their precarious financial position cannot be put right with newly created dollars.

“Many loans were made recklessly and imprudently, and the borrowers as well as the lenders are suffering the consequences. Low interest rates and easy money will not make economic those houses built on speculation, those shopping malls built unnecessarily and those companies whose business models rested upon ill-founded assumptions about the health of the U.S. economy. The debts of imprudent borrowers cannot be repaid in a timely way because they own assets acquired in the boom that with the benefit of hindsight are uneconomic even with zero interest rates.

“What’s needed today is the same medicine that has over time inevitably cured every other bust. It is capital and savings, and unfortunately, they are in short supply in today’s America. But the Federal Reserve will not be deterred from pursuing the reckless path it is on. They seem to think that they can avoid the bust, and further, that the economy can emerge unscathed from years of imprudent and reckless credit extension by the banks.

“History says the Fed is mistaken, but history also tells us something else. The consequences of the Fed’s actions will debase the dollar, perhaps irreparably so.”

The U.S. dollar has been falling all week. After a big step down Monday, the dollar got slammed again yesterday following the Fed’s cut. Roll the videotape:

The dollar index has fallen about 1 point every day over the past five… huge moves for the typically sluggish index. This morning, the index is once again battling with 80.

The euro soared after the Fed’s announcement, up a full 5 cents, to $1.41. The pound rose 2 cents, to $1.54.

And the yen found itself a new 13-year high at 88. And why not? Now that lending rates in I.O.U.S.A. are essentially the same as in Japan, what’s to stop the dollar from becoming the new carry trade currency of choice?

(BTW, we’re working on another way for you to profit from the falling dollar… we’ll fill you in Friday.)

But the good news… gold. Our favorite metal is up again today, to around $850.

Oil didn’t get much of a kick from the dollar’s fall yesterday. The front-month crude contract stayed put at $44. Even after OPEC announced they would cut back production twice as much as expected this morning, oil fell. It’s around $41 as we write.

Still, it looks like the bottom may be in for gas prices. The national average price at the pump has been inching up all week, to now $1.66.

50% of American companies are currently planning on reducing labor costs, says a recent survey by human resources firm Hewitt Associates. Companies that tell Hewitt they will be cutting back say the average pay raise for 2009 will be less than 3%… the lowest average hike in the study’s 32-year history. Of all industries, auto-related workers can expect the worst raises — about 1.4%, the survey said. Those in construction and engineering will do best, averaging a 4.5% bump.

So how can you come out on top? Hewitt reports that business will be probably focus on performance-based rewards next year. 69% of companies polled offer incentive-based pay, while 24% say they’ll add such plans next year.

Facing a $15 billion budget gap, New York Gov. David Patterson called for 88 new fees and taxes in his newly revised state budget. Included in this reform are new taxes on movie tickets, taxis, soda, beer, wine, massages and cigars. All kinds of motor vehicle licensing, registration and ticketing fees will rise… there’s even an “iTunes tax” that will nickel and dime “digitally delivered entertainment services.”

“We’ve made too many promises and asked for too few sacrifices,” said Patterson. “We’re going to have to change our culture as we know it.”

Whoa, David… you want to tone it down a bit? This is America. Home of the brave. Land of the free (and easy credit).

So the former chairman of Nasdaq bilked investors of $50 billion dollars… what’s the big deal?

The sum pales in comparison to the unfunded liabilities of the government. And at the very least, “investors” had a choice whether to give him their money or not.

Uh-oh… keep this off Capitol Hill, too: According to a USA Today survey, 67% of potential car buyers would consider buying GM, even if it entered bankruptcy. The newspaper’s poll (in conjunction with Gallup) flies in the face of the data we hear touted by congressional Democrats almost daily… 80% of their respondents said they wouldn’t buy from a bankrupt auto biz.

“I don’t think,” writes a reader, “the results we have seen so far in this downturn are anywhere near as bad as they are going to get. My partner and I have been traveling quite a bit recently, including three weeks in India, and we have found Fortune 100 companies for the most part all acting the same way worldwide. No new hires. No raises. No bonuses, no parties, no kickoffs. Basically, battening down the hatches. This is going to have a huge impact on all the service- and support-related industries — conventions, party planning, hotels, advertising, etc. And once the fallout from the bad retail Q4 sales kicks in, bankruptcies, etc., commercial real estate bubble will be caving in.

“There really isn’t going to be anywhere to hide. All the industries that have been fueled by the easy-credit binge are going to be seriously effected, and quite a few will go by the wayside. It is the companies that have strong balance sheets and CASH that are willing to invest in themselves and keep their heads down and grind out their particular value that will survive and, once we come out the other side — and we will — flourish. Innovation and value are the keys to survival.”

“Thanks for the snapshot,” writes another, “of the govt. income statement and balance sheet . Love the quirky accounting. I would suggest, however, that all is not as bad as it seems. I am a commercial banker by trade and enjoy the ‘hidden value’ analysis often used by Chris Mayer when making his recommendations.

“Although it in no way excuses the ridiculous spending spree our government has undertaken, I would venture to say that the asset side of our balance sheet is seriously understated. There is probably enough ‘hidden equity’ in the good ole USA to offset the negative equity position shown. Again, not trying to justify what is happening, but instead of being ‘really ugly,’ it’s just ‘ugly.’”

The 5: We’d like to agree with you, but wonder what — and whose — assets you might be referring to. Who is “our” in your assertion?

The quirky accounting, by the way, comes compliments of the U.S. Treasury.

“This CBS News 60 Minutes segment ,” writes a reader, “does a really good job of explaining some of the mortgage problems that wait for us in our very near future. You guys should include a link to this in The 5 Min. Forecast. They state that the worst has yet to come, but still contend stocks are a great buy right now. I would be interested to hear your comments on this.

The 5’s comment: They’ve got 60 whole minutes to forecast, and that’s the best they can do? We commented on this Credit Suisse data in May and again in June.

Source: Fed “Shock & Awe,” What 0% Means, 2008 Pay Raises, Controversial Auto Survey and More!

Well… Another day of doldrums in the currencies, with the bias, what little there is, to buy dollars. The stock jockeys received some manna from heaven yesterday when it was announced that the U.S. Treasury Department is considering a plan to halt the slide in home prices that would lower mortgage rates using Fannie Mae and Freddie Mac. The plan could reduce rates for newly issued loans to as low as 4.5%.

Here’s a snippet of the story that ran in the Wall Street Journal yesterday…”Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.

Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.”

OK… So they came up with a plan… I have to think about this a bit, as I see the “good” it could do, but there’s always a “bad” to these things too, and once again, I’m sure it circles around the fact that Gov’t is going to be in the mortgage business… We inch closer and closer, all the time to socialism folks… It all began when they mandated that in a free country we HAVE to wear seat belts… Now don’t get me wrong, I wear them because I believe it’s the safe / right thing to do, but shouldn’t that be MY choice and not the mandate of the Gov’t? Any way, please don’t flood my email box with notes telling me how wrong I am on this… It won’t help, this is what I believe, period!

Whew! I really went off on a tangent there, eh? OK, before you begin to think I’m a nut case… Let’s get back to currencies and economies!

The Reserve Bank of New Zealand (RBNZ) did cut rates, as I suspected, by 150 BPS yesterday… This brings the total of rate cuts by the RBNZ since September to 325 BPS! I think the RBNZ truly believes that global inflation is taking a major step backwards… And it probably is to a degree, but the RBNZ had better be ready to go the “other way” once this slide in inflation tips back… Of course I don’t believe we’ll see that for some time (6-months at least), so go ahead and frolic in the sun with rate cuts while you can RBNZ… Just be ready, that’s all I’m saying…

Bond holders of New Zealand issues have to be frolicking in the sun for sure, and their “locked in yield to maturity” is now, at least 150 BPS, if not 325 BPS higher than new issues, which makes their bonds “more valuable”…

U.K. Prime Minister Gordon Brown unveiled a scheme to allow borrowers experiencing a temporary loss of income due to the downturn to defer mortgage interest payments for up to two years. The U.K. Gov’t will guarantee the lenders against the risk of loss from the deferred payments… That’s going to be quite interesting to see how that plays out… But shoot Rudy, if the Gov’t is going to let you go Ollie, Ollie, oxen free on your mortgage payment for two years, with NO bad stuff happening to you and your credit, I can see the mortgage holders lining up on the right for this!

The U.S. Fed Reserve’s Beige Book that usually gives us an indication of what to expect in the next FOMC meeting, which will take place December 16th, printed yesterday… And it could be probably listed on Amazon under “horror” books! Put away the sharp objects folks, for it’s not just me ranting about these problems any longer, the Fed Reserve, your Central Bank, you know, the people that are supposed to be protecting the value of our currency, by providing price stability, and full employment (and are failing miserably at both!), now are ADMITTING that the problems are real… Here’s a short review from the Beige Book…

Based on data collected prior to November 24th, the Beige Book painted a grim picture of the outlook for growth in the fourth quarter. Lenders tightened standards for loans and lending contracted over the period. Several districts noted increases in delinquencies and defaults.

Consumer spending, which played a lead role in the growth downturn in the third quarter, was reported to have weakened.

Hey, this little tidbit came across my screen yesterday… The number of days that the S&P 500 has moved up or down by more than 5% during the Trading Day… 1950 – 2006 34 days… 2008 44 days! With 22 of them coming since October 1st!

Talk about volatile! WOW!

OK… One of my fave economic writers, Caroline Baum, wrote a piece on Bloomberg that caught my eye… Hey! That makes sense now, since I really can only see good out of one eye! Anyway… Here’s a snippet of the story by Caroline Baum, titled, “Bernanke should buy Buicks instead of bonds”…

“It tells you just how far we’ve come when the headline, “Fed May Buy Treasuries,” gets a reaction.

Buying Treasuries is the age-old way of adding reserves to the banking system, setting in motion the money-creation process.

Historically, these so-called permanent open market operations were designed to have no impact on the shape of the yield curve. The goal was simply to satisfy the banking system’s demand for reserves.

Treasury securities used to make up the lion’s share of the Federal Reserve’s balance sheet. No longer. As of Nov. 28, the Fed held $476 billion of securities carrying the full faith and credit of the U.S. government, less than a quarter of its balance sheet. One year ago, the comparable figures for the Fed’s Treasury holdings were $780 billion and 90 percent.

When the banking system starts functioning again, and the Fed has to mop up all the excess reserves banks are holding instead of lending, the reality is “it doesn’t have enough Treasuries,” said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

Banks were holding $605 billion of reserves in excess of the amount required as of Nov. 19. “Maybe the Fed will have to raise reserve requirements,” Kasriel says. “It’ll be 1937 all over again.”

Many Great Depression scholars, including the late Milton Friedman and Anna Schwartz, point to the Fed’s doubling of reserve requirements in 1936-1937 as triggering the second leg down in the economy, which was recovering in the mid-1930s.”

OK, back to me… All this talk today is causing me to search for something “fun” to talk about, because it’s all been gloom and doom, eh?

Sweden’s Riksbank announced a 175 BPS rate cut this morning. WOW! Another Huge cut, makes you think that the Bank of England and European Central Bank might have something up their sleeves too! And in Canada, their Central Bank doesn’t meet until next week, but Canada has other problems going on, as there are rumblings about a suspension of Parliament…

The Governorator, Arnold Schwarzenegger, has called a Fiscal Emergency for the state of California… I feel like he won’t be the only governor to do so… You see, the Federal Gov’t is giving all it’s McLovin’ to Financial Institutions right now, and the States are hurtin’ for certain… The states that have for decades told the Fed Gov’t to “get out of their business”, will now be knocking on the Gov’t’s door, and be the next in line to ask for bailouts…

And then, one final thought before going to the Big Finish… I saw this yesterday, and almost fell out of my chair! (now that would not be a good thing!) Let’s see what your take is on this….

I know that sure seemed as though the Fed and Treasury had found every last way of pushing off debt from one generation to the next, BlackRock’s Peter Fisher has thought of a clever new one: a 100-year treasury bond. That way, the government can keep borrowing money to finance today’s bailouts, and won’t really have to start bleeding cash until after most of us are dead and gone…

Let’s hope that thought by Peter Fisher doesn’t even cross the minds of Paulson and Bernanke!

Currencies today 12/4/08: A$ .6470, kiwi .5365, C$ .7945, euro 1.2640, sterling 1.46, Swiss .8245, ISK 261, rand 10.2585, krone 7.17, SEK 8.3430, forint 207, zloty 3.0650, koruna 20.3425, yen 92.55, baht 35.70, sing 1.5275, HKD 7.7510, INR 49.85, China 6.8820, pesos 13.62, BRL 2.4790, dollar index 87.22, Oil $47.16, Silver $9.57, and Gold… $769.35

Source: Buying Buicks Instead Of Bonds